Insufficient data could prevent RBI from achieving mandated inflation target

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Non-availability of retail inflation numbers for April and May means the RBI may not be able to achieve its mandated inflation target. The inflation, as per the central financial institution was at 4% with a tolerance band of 2% on both facets. If the average inflation rate is greater than the prescribed tolerance stage for any three consecutive quarters, it’s considered a failure in achieving the mandated inflation target.  

The basic inflation rate, at 6.1% in June, has breached the greater band of the Reserve Bank of India’s inflation target. The lowest mandates that RBI must keep the inflation in between 2 per cent and 6 per cent, along with a target to move towards 4%. The inflation rate was higher than Bloomberg’s consensus estimate of 5.3 per cent. This sharp increase resulted to hit pause the RBI in August monetary policy committee (MPC) meeting. 

Due to COVID-19 RBI has been at the forefront of the fight in the form of rate cuts and liquidity to ensure the financial market is stable. At the same time, the MPC that the imputed inflation and lack of supply-side support have led to a failure in inflation mandate. The committee is extremely concerned with most of the factors that contributed to inflation during the pandemic situation are beyond the RBI’s remit. In some instance, the members are likely to have raised the questions about the supply of essential commodities and related products were managed by the government from March onwards. 

The CPI inflation rate jumped to 6.93% in July, which means that the monetary policy committee has technically failed to meet the respective mandate. According to the RBI act, if the committee is deemed to have failed then the headlines retail inflation remains the mandated range in between 2-6 per cent for the three consecutive years. Sizeable inflation pressures can be seen in the miscellaneous category of the CPI, with a rising of 1.5% index rate in June. The cost-push pressures in the form of high taxes on petroleum products, telecom charges, rising raw material cost etc affected the upward revisions in steel prices and rise in gold price too which makes a hindrance in achieving the inflation target. As per analysts, the pandemic situation will be so tough for the economy to manage inflation rate so the government needs to understand the situation and take actions on the supply side to reduce inflationary pressures.

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